Last updated on March 1st, 2022 , 09:08 am
Long Call Definition: The long call is a low probability bullish options trading strategy with unlimited profit potential.
Short Call Definition: The short call is a high probability bearish options trading strategy with unlimited risk.
As with stock, options can be both bought and sold. The profit/loss profile for a long call is the polar opposite of a short call.
Before we dive into comparing the short and long call options, it is necessary to understand the fundamental difference between long and short options.
- Long option positions give the owner the right to buy or sell a security (call & puts) at a specific price (strike price) on or before a specific date (expiration date).
- Short option positions have no rights and must stand ready to either sell stock (call options) or buy stock (put options) when and if the long party exercises their right.
TAKEAWAYS
- The long call is a low-probability bullish strategy with limited risk.
- The short call is a high-probability bearish/neutral strategy with unlimited risk.
- Long calls profit when the underlying moves up significantly in value.
- Short calls profit in both neutral and bearish markets.
- The maximum loss for long calls is the debit paid; the maximum loss for short calls is infinite.
- The maximum profit in long call options is unlimited; the maximum profit in short calls is the credit received.
| Long Call | Short Call | |
|---|---|---|
|
Market Direction |
Bullish |
Neutral and Bearish |
|
When To Trade |
Best for traders very bullish on a security |
Best for traders who believe a security will either be neutral or fall in value. |
|
Maximum Profit |
Unlimited |
Credit received |
|
Maximum Loss |
Entire debit paid |
Unlimited |
|
Breakeven |
Strike Price + Debit Paid. |
Strike Price + Credit Received. |
|
Time Decay Effect |
As time passes, and both implied volatility and stock price stay the same, a long call will persistently shed value. |
As time passes, and both the implied volatility and stock price stay the same, a short call option will shed value – which is desirable for short calls. |
|
Probability of Success |
Low |
High |
Long Call vs Short Call: Key Differences
When it comes to the profit/loss profile, the long call is the exact opposite of the short call. Before we dig into the individual strategies, let’s explore a few of the fundamental differences between the long call and the short call.
1.) Long Calls vs Short Calls: Trade Cost
Long Call Option: Whenever you buy an option, the cost of that option will be the cost of the trade. If a long call option is trading at 3.50 and you purchase this option, a debit of $350 will be deducted from your account.
When buying options, the true cost of the trade is calculated by moving the decimal of the quoted price two places to the right. This is because of the multiplier effect, which gives options a 100×1 leverage.
Short Call Option: The trade cost of selling call options is a little murkier than buying call options.
Whenever you sell naked options, a credit is made to your account. Since there is no upfront debit paid, and the trade does indeed have risk, your broker will require that funds be held in margin.
At tastyworks, this margin requirement is the greater of:
2.) Long Calls vs Short Calls: Maximum Profit
In long calls, the profit is unlimited. There is no upside cap on how high a stock can run, therefore, the profit potential in a long call is infinite
In short calls, (as with all short options) the maximum profit is always the credit received. You can never make more than the initial credit received.
3.) Long Calls vs Short Calls: Maximum Loss
In long calls, the maximum loss is limited to the initial debit paid for the call option. Since options can never fall below zero in value, the maximum loss for long calls is the upfront debit paid.
In short calls, the maximum loss is unlimited. We mentioned earlier that the maximum profit on a long call is unlimited. Therefore, the maximum loss on short calls must be infinite.
4.) Long Calls vs Short Calls: Breakeven
➥ The long call breakeven is Strike Price + Debit Paid.
➥ The short put breakeven is Strike Price + Premium Received.
5.) Long Calls vs Short Calls: When to Trade?
Long Call Trade Example
In this example, we are going to look at an at-the-money call option (strike price near the stock price). Here are the details of our trade:
‣ Initial Stock Price: $105
‣ Call Strike and Expiration: 105 call expiring in 31 days
‣ Call Purchase Price:$3.40
‣ Call Breakeven Price: $105 call strike price + $3.40 debit paid for call = $108.40
‣ Maximum Profit Potential: Unlimited
‣ Maximum Loss Potential: $3.40 call purchase price x 100 = $340
Long Call Trade Results
In this long call example, the stock price never traded higher than the call’s breakeven price. Additionally, the stock price also never fell significantly below the call’s strike price. As a result, our call experienced a slow decay, which lead to losses.
However, there were opportunities for us to close this call for a profit.
To close a long call position before expiration, a trader can simply sell the call option at its current price.
Short Call Trade Example
In this example, we are going to look at an out-of-the-money short call. Here are the details of our trade:
‣ Initial Stock Price: $119.94
‣ Call Strike and Expiration: 125 call expiring in 71 days
‣ Call Sale Price: $1.52
‣ Call Breakeven Price: $125 call strike + $1.52 credit received = $126.52
‣ Maximum Profit Potential: $1.52 credit received x 100 = $152
‣ Maximum Loss Potential: Unlimited
Let’s next see how this short call performed!
Short Call Trade Results
In this short call example, the stock price gradually increased in price from $120 to $126. Our short 125 call never experienced material losses during this time.
With 11 days to expiration, the stock price was above the short call’s strike price of $125, and the position had small profits.
Time decay was able to fight against any directional losses in this trade.
The decrease in the call’s price from its initial sale price of $1.52 offered us the opportunity to buy back the call for a profit before the option expired. At 40 days to expiration, the 125 call’s price fell below $0.75, which represents a $77 profit for the call seller at that moment.
If we held this option until expiration, the position would expire worthless. Why? The stock price was below the short call’s strike price.
In this trade, our full potential maximum profit of $152 was realized.
Long Call vs Short Call FAQ's
In options trading, “long” implies either ownership of a single option(s), or a net debit transaction. The term “short” implies the sale of an option(s), or a net credit transaction.
A naked call is a neutral to bearish strategy with unlimited risk; a long call is a bullish strategy with only premium risk.
A “call” option is a broad term used to describe a security. You can both buy and sell call options. When a trader purchases a call option, they are “long” that option; if a trader instead sells a call option, they are “short” that option.
Long calls generally need the underlying security to rise substantially in value in order to profit. Because of time decay (theta), most out-of-the-money call options expire worthless, resulting in a maximum loss scenario. Maximum profit in long calls, however, is infinite.
The total loss potential on a long call is the debit paid. This scenario will occur if the stock price is trading below the strike price on expiration. From a total risk perspective, long calls are safer than short calls.
Selling naked calls is the riskiest options trading strategy. Since a stock has no upper bound, short call options have infinite risk.
